In a globalised world, managing domestic economic conditions requires having one eye focused abroad.

For evidence, look no farther than the global monetary policy fallout from Britain's June 23 vote to leave the European Union.

On Thursday, European Central Bank officials said monetary policymakers are considering loosening rules for mass bond purchases. Mexico raised its key interest rate by a half-point after the peso tumbled following the UK's vote, and a Federal Reserve official said US monetary policy needs to take global events into account.

The examples all point in one direction: If you're a central banker concerned with your own nation's economy, you can't afford to ignore the international context.


Global markets are intertwined, trade linkages are deep and foreign-exchange flows can tighten financial conditions even when monetary policy remains accomodative.

"We have to think globally and be aware," Robert Kaplan, president of the Dallas Fed, said in an interview Thursday.

"We're the central bank of the United States, and that is our obligation. Having said that, in order to serve the United States, we've got to be aware of, and up-to-date on, financial and economic conditions globally."

As Britain tends to its own economy, easing looks likely to be the monetary policy response.

In his second televised address since the Brexit vote, Bank of England Governor Mark Carney said "the economic outlook has deteriorated and some monetary policy easing will likely be needed over the summer."

In the euro area, which is closely linked to the UK's situation because its member countries are also EU members, monetary authorities have also had to respond to Brexit's fallout. Policymakers are concerned that the pool of securities eligible for their quantitative-easing program has shrunk after investors piled into the region's safest assets and pushed yields on some sovereign debt too low to meet current criteria.

In light of that, some ECB Governing Council members now favour changing the allocation of bond purchases away from the size of a nation's economy toward one more in line with outstanding debt, one euro-area official said.

Even in the United States, which is less directly affected by Britain's move, Fed officials are reacting with caution.


Fed Governor Jerome Powell said Brexit shifted global risks to the U.S. economy more to the downside, and going forward "it will be important to assess the implications for the US economy, and for the stance of policy appropriate to foster continued progress toward our objectives of maximum employment and price stability."

Kaplan said that to him, the fact that globalisation has tied the fates of major economies to some degree argues for being "patient and gradual" in removing monetary policy accommodation. He said that he's watching to see what Brexit's effects are -- most importantly keeping an eye on spillover effects.

We have to think not just about whether our domestic monetary policies are appropriate, but whether they are properly aligned across jurisdictions.

"Is there contagion? What does Ireland do? What does Scotland do? What do other EU countries do?" Kaplan said. "It will take a significant amount of time to see how all that unfolds."

Easier policy and extra caution aren't catch-all responses to global economic risks. Banco de Mexico increased its key interest rate a half-point to 4.25 per cent Thursday, after the peso tumbled briefly to a record low following the Brexit vote. The median forecast of 26 economists surveyed by Bloomberg was for a quarter-point increase.

Nor are individual responses the only option in an interconnected world: On Tuesday, ECB President Mario Draghi called for more explicit international policy coordination.

"We have to think not just about whether our domestic monetary policies are appropriate, but whether they are properly aligned across jurisdictions," Draghi said in Sintra, Portugal, at the ECB's annual policy forum. "In a globalised world, the global policy mix matters."


Central banks may more heavily weigh global events partly because they're operating in a world where monetary policy is the only pillar supporting growth, and so they feel the need to account for every risk, said Stan Shipley, chief economist at Evercore ISI in New York.

"They know that they are essentially the only game in town, and they're getting no help -- or little help -- from fiscal policy," Shipley said. "So they are scared that they will make a forecasting error and they don't have the right policy tools going ahead. They're scared of their own shadow right now."